Integrated reporting takes a big step with international framework draft

The release of a highly anticipated proposed framework Tuesday
heralded a new chapter in the evolution of corporate reporting.

The International Integrated Reporting Council (IIRC) made public a
framework
consultation draft—a blueprint for how the group hopes
businesses will communicate with stakeholders.

Developed with input from business, investors, standard setters,
accounting bodies, and nongovernment organizations, the framework is
designed to build on existing practices in financial and nonfinancial reporting.

An integrated report (IR) is a concise communication about how an
organization’s strategy, governance, performance and prospects, in the
context of its external environment, lead to the creation of value
over the short, medium, and long term.

Integrated reporting, as described by the IIRC, aims to:

Achieve a more cohesive and efficient approach to reporting.

Inform capital allocation decisions.

Enhance accountability and stewardship.

Support integrated thinking.

Corporate reporting has not kept pace with the risks of
financial instability and unsustainability that threaten the
livelihoods of communities across the world, Mervyn King, the IIRC
chairman, said in a news release. Integrated reporting gives
businesses the responsibility to communicate how they create value
over time.

“[Integrated reporting] will lead to changed behavior, a focus on
the future as well as the past, and a reporting model that reflects
and communicates the reality of business, its operations and its
impacts, in the 21st century,” King said.

Comments on the proposal, which can be made through the IIRC
website, are due July 15.

Pilot program

The IIRC, which held 15 events around the world on Tuesday to launch
the proposed framework, has been working with businesses and investors
in a pilot program to develop the framework draft through trials and
testing. The goal is to provide transparency about intangible factors
such as intellectual property, brand, talent, and environmental
resource use that, in the IIRC’s view, have been insufficiently
integrated into strategic decision-making and reporting.

“The IIRC has built consensus around the idea that the current
corporate reporting model must change to meet the needs of today’s
business and investment environment,” IIRC CEO Paul Druckman said in a
news release. “The framework is the product of business and investor
input and testing involving over 300 individuals and organizations.”

HSBC and Unilever are among the participants in the pilot program
and were represented at the IIRC’s launch event in London. Unilever
CFO Jean-Marc Hüet said the move to integrated reporting has
allowed management to make more holistic decisions in areas such as
capital expenditure.

“Internally, it’s helping us make much better trade-offs,” Hüet
said. “Let’s say there is a capital expenditure investment that needs
be taken into account, it will not be purely driven by just financial
KPIs. All the way up the chain we will be asking ourselves what are
the financial and nonfinancial consequences and uses of that capital
expenditure program.”

Another benefit for Unilever is that integrated reporting allows the
company to demonstrate to internal and external stakeholders that it
operates a sustainable business.

“If you go to the young consumer today, wherever in the world, they
absolutely care about sustainability,” Hüet said. “It is incredibly
important to demonstrate how sustainability can drive growth and
reduce cost. It’s hugely important to our investors and consumers, and
increasingly to employees that want to work for good companies.”

HSBC group Chief Accounting Officer Russell Picot said the major
benefit of HSBC’s integrated reporting evolution has been a
“decluttering” of information that is presented internally and
externally.

“The clarity of expression of our business model has great
benefits,” he said. “We’ve got 270,000 people working at HSBC, and
banks are quite complex. If you actually manage to describe … the
essence of what we do, it’s actually a great benefit to the outside
world and also the inside world. It gives our employees clarity about
what people do when they come to work and the essence of what they are
trying to achieve.”

Picot and Hüet both said the major challenge to an integrated
reporting model is establishing and reporting nonfinancial KPIs that
are consistent and comparable.

“There are a lot of challenges around this because essentially it is
like asking someone who is English to speak French from one day to the
next,” Hüet said. “It’s a new language, and the lack of comparability
combined with the amount of time it takes to give third-party
assurance to some of these KPIs is a difficult challenge.

“Most of these KPIs need to be measured over a long period of time,
whereas financial KPIs are measured by a fiscal year.”

IR principles

The principles guiding contents of an integrated report are
described as:

Strategic focus and future orientation. Reports
would give insight into an organization’s strategy and ability to
create value.

Connectivity of information. Reports would show how
components that an organization uses to create value are
interconnected and dependent on one another.

Stakeholder responsiveness. Reports would describe
the organization’s relationship with its key stakeholders and how
the organization responds to their needs.

Reliability and completeness. Reports would include
all material matters, both positive and negative, in a balanced way
without material errors.

Consistency and comparability. The information
would be consistent over time and allow comparison with other organizations.

What does an IR look like?

An integrated report should be a stand-alone document, according to
the framework draft, that focuses on seven key areas:

1. Organizational overview. IRs would describe what a
business does and the circumstances it operates under. This includes
culture and ethics; ownership and operating structure; principal
markets; products and activities; and the competitive landscape and
market positioning. Data on workforce, revenue, and geographical reach
would be included, and factors that affect the external environment
would be analyzed, including legal, commercial, social, environmental,
and political factors.

2. Governance. An IR would provide insight on how an
organization’s governance structure supports its ability to create
value in the short, medium, and long term. This would include
leadership structure; strategic direction and approach to risk
management; how culture, ethics, and values affect capitals; and how
remuneration is linked to value creation.

3. Opportunities and risks. An IR would explore the
opportunities and risks that affect an organization’s ability to
create value over the short, medium, and long term, and how the
company is dealing with them. Reporting would identify the source of
internal and external risks, assess on the likelihood the opportunity
or risk will come to fruition and its potential magnitude, and show
steps that are being taken to mitigate risks.

4. Strategy and resource allocation. An IR would
describe where the organization wants to go, and how it intends to get
there. It would identify the means by which an organization plans to
achieve its objectives, including how it plans to deploy resources to
implement its strategy. How the organization would measure outcomes
also would be reported.

5. Business model. Reporting would include key inputs
and how they relate to the capitals from which they were derived. The
report would describe key business activities, such as how the
organization differentiates itself in the market, how the need to
innovate is approached, and how the business model has been designed
to adapt to change.

6. Performance. An IR would describe the extent to
which the organization has achieved its objectives, and how its
outcomes have affected the capitals. The state of key stakeholder
relationships would be described, and links between past, current, and
anticipated future performance would be described.

7. Future outlook. Challenges and uncertainties that
the organization is likely to encounter would be described in the
report. The possible effects of these challenges on the business model
and future performance would be reported as the IR describes how the
organization is equipped to respond to difficulties it may face.

CGMA partners

The AICPA and the Chartered Institute of Management Accountants
(CIMA), which through a joint venture created the CGMA designation to
elevate the profession of management accounting, have supported the
IIRC and have been longtime advocates of integrated reporting.

“The AICPA has long supported efforts to develop a voluntary global
framework for business reporting to complement financial reporting,”
said Melancon, who recently was appointed to represent the AICPA on
the IIRC council. “The release of the draft framework represents
important progress toward this goal.”

Tilley, who also is a member of the IIRC council, said integrated
reporting is more relevant reporting and provides an explanation of
the business model and how value is created.

“This provides real value to business, both internally through
integrated thinking and staff motivation, and externally by more
effective communication to stakeholders,” Tilley said. “Ultimately it
connects long-term sustainability to short-term profitability.”

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